Investment Cycle in the Telecommunications Industry A Venture Capital Perspective

Transcription

1 Investment Cycle in the Telecommunications Industry A Venture Capital Perspective Thierry Van Nieuwenhove BancBoston Capital ( / vnthierry@bkb.com.br)

2 CONTENT Before 1996 : The Natural Monopoly era : The Golden era Since 2000 : The Restructuring

3 BEFORE 1996 : OVERVIEW The telecommunications industry was seen as a boring, natural monopoly, similar to water, electricity and gas companies ( POTS ); Companies were generally state-owned (except US); Cash-flows were stable and predictable, growing in line with the installed base of phone lines; Although technological innovations were introduced (i.e analog to digital, wireless), these did not structurally transform the industry s structure.

4 BEFORE 1996 : EARLY SIGNS OF CHANGES Creation of MCI in 1970; Privatization of British Telecom, creation of a duopoly structure and development of cable telephony industry in the U.K. in the 80 s; Privatization of state-owned monopolies in Western Europe, Asia and Latam in the early 90 s; Introduction of multi-carriers systems for long-distance calls in Chile in 1994; Creation of a dynamic, competitive wireless industry (first VC funding).

5 Before 1996 : PRIVATIZATIONS Telecoms privatization Total : $ 159Bn Number of privatizations Total : % 14 80% Others % Latam and Caribbean 8 40% 20% Western Europe Asia-Pacific % Source : ITU

6 Period : Background Combination of three factors led to an unprecedented investment boom in the telecom sector : Liberalization / deregulation (Telecom Act of 96, EU s directive for a single market for telecoms services by 98, introduction of WTO rules in 98) => $120Bn US local telecom market open to new entrants; Technological innovation (Internet/Data, LMDS, CDMA, DSL,...) => Opportunity to offer new services at more attractive prices; Strong economic growth in the US and Western Europe => Availability of capital +Optimism about telecom market growth.

7 PERIOD : Investment Boom Capex/Turnover (USA) Telecom Act 2x 0,36 Avg.: 0,21 Stable 0,18 0,17 0,17 0,17 0,18 0,19 0,18 0,22 0,23 0, Annual Growth : Capex 2% 1% 6% 11% 10% 4% 32% 16% 40% 46% Turnover 3% 4% 5% 4% 7% 9% 6% 10% 14% 14% Source : JP Morgan; Pegasus

8 Period : Types of investors The opening of the market was seen as an opportunity by 3 different classes of equity investors : Telecommunications companies (geographical expansion or product extension); Large conglomerates diversifying into the telecommunications industry (Mannesman, Hutchison, Andrade Gutierrez, Impsa,...); VC s backing emerging telcos using novel technologies to leap into new markets (Colt, Covad, Winstar, Diveo, Metrored, Vesper, Optiglobe,...).

9 USD Billions PERIOD : Emerging telcos Emerging Telcos' Funding Sources Bank Financing High Yield Financing Public Equity Financing Private Equity Financing Total Financing Source : Thomson Financial, DBAB

10 PERIOD : Role of Venture Capital VC Investments, Products and Services 25% Heathcare 15% Communications & Networking 24% Source : VentureOne Other IT 36%

11 Period : VC interest in the sector Large market opportunity : Size of the US telecom industry of $260Bn; Optimism related to growth of new services / technologies ( Internet traffic growing at 100% per quarter in 1H97 ); VC overfunding ; Possibility to invest large $ amounts per transaction. Number of Billion-Dollar Funds by Vintage Year Year Venture Capital Buyout & Mezzanine Total Source : Venture Economics

12 USD Billions PERIOD : Role of Venture Capital 120 Commitments to US Venture Capital Funds, Q02 Commitments to VC Funds VC investments Source : VentureOne, Natl. Venture Capital Association

13 Turning Point : European 3G Licences 3G auctions in Europe marked the peak of the telecom bubble and the reversal of investors perception; Country Licences Total Fees Fee / Capita (Euros Bn) (Euro) UK 4 36,8 630 Germany 6 50,5 611 France 4 19,8 335 Italy 5 12,2 213 Total 119,3 More than US$100Bn were committed without any clear understanding of financial returns, market potential, customer needs, services / products, technology availability,...

14 Since 2000 : Sector Underperformance 200 Telecom Stock Performance /31/99 03/31/00 06/30/00 09/29/00 12/29/00 03/30/01 06/29/01 09/28/01 12/31/01 03/29/02 Source : Bloomberg, BancBoston Capital IXC Emerging Telcos RBOC SPX Europ. Telcos

15 Since 2000 : Downward Spiral Plunge in market values of listed telecommunications companies; Liquidation or debt restructuring of most emerging telcos; Credit rating downgrades of several incumbent companies reflecting a worsening of the fundamentals even among blue chip telecom companies. Date ATT Date Worldcom Date BellSouth Date France Tel. Date BT 24/10/96 AA- 01/07/99 A- 21/06/88 AAA 07/11/91 AAA 07/05/96 AAA 06/11/00 A 27/02/01 BBB+ 30/06/00 AA- 03/03/97 AA+ 24/05/99 AA+ 29/10/01 A- 22/04/02 BBB 11/07/01 A+ 22/12/99 AA 24/08/00 A 20/12/01 BBB+ 20/05/02 BB 28/02/00 AA- 10/05/01 A- 23/08/00 A 16/02/01 A- 25/09/01 BBB+ Source : Bloomberg, S&P

16 Since 2000 : Emerging Telcos Woes? Overexpansion : Geographic, Product and Customer; Overcapacity : Number of US CLEC s jumped from 50 to 500 between 1995 and 2000; Debt overload : RBOC IXC CLEC Debt 52% 41% 56% Preferred 0% 3% 18% Equity 48% 56% 25% EBITDA margin 39% 27% -15% Dismal operating performance : Industry ROE plunged from 20% in 1996 to 5% in 2000, while most emerging telcos are still EBITDA negative; Regulatory issues : Incumbent s obstructive behavior; Economic downturn : Impact on take-up of new services, pricing, churn,...

17 Current Trends : Emerging Telcos Concentration / Consolidation More bankruptcies (PSINet, Winstar,...); Sale of troubled companies assets (Exodus, Global Crossing,...); Limited Mergers and Acquisitions activity (Digex, Pegaso,...). Restructuring of balance sheet Capital injection by existing or new shareholders (Vesper, Globo Cabo,...); Renegotiation of existing liabilities (Covad, Impsat, Vesper, Pagenet,...). Focus on operating performance / cash flows Cost reductions; Narrowing of companies focus; Capex cutbacks and infrastructure sharing. Best companies will survive and prosper in the medium term.

18 Thank You Very Much!